Withdrawal Limit: When Banks Restrict Your Money

MIKE BARNES 0:10

Welcome to America’s Gold Authority Podcast. My name is Mike Barnes. Check the forecast, and there could be some storms coming in the financial world. How’s that going to affect you? And do gold and silver play a factor in keeping you afloat? Let’s talk to our experts about that. Brad Chastain and Philip Diehl join me now. And Philip, let’s start with you. As the 35th Director of the U.S. Mint and president of U.S. Money Reserve, you’ve seen some financial storms in the past. How do we get through this if it does hit?

PHILIP N. DIEHL 0:39

Yeah, yes indeed. Well, I wasn’t around for the Great Depression, but uh I have I’ve seen I’ve seen enough of them. Uh I came out of college right at the time of the 73-74 recession, which was a very bad one, uh looking for jobs in those days for young college students was about like what it is today. And uh so um, but during the last 100 years, we’ve had five multi-year uh recessions, including the Great Depression, some of them much more difficult than other ones. And it’s really remarkable to look at the difference between gold’s performance and stocks’ performance. Gold has gone up by uh by a substantial amount during each of those, from 8%, relatively modest, to as high as uh 68% over those course of year and a half, two-year, three-year uh recessions. On the other hand, stocks have declined typically between 90, 29% and as much as 81% during those periods of time. So that really demonstrates gold’s ability to protect uh uh portfolios uh in uh in really hard times. Now, one of the things that’s really different now in the last 25 years or so is that gold has also become an extraordinarily strong performer even during good times. We’ve seen over the last several years as uh the SP 500 has set record after record highs. Uh the gold has been right alongside it, also setting new record highs. Both of them are in correction right now, along with with bonds, and that’s having all three in uh in making uh correction moves uh is a is really a clear sign that of uh oncoming financial difficulties. And and we’re seeing that in the the increase in inflation rates, we’re seeing it in uh losses of jobs, in a rising unemployment rate, we’re seeing it in a softening of consumer spending. Uh about something like 23 or 24 states today are in recession. And two of the big ones that aren’t in recession, California and New York, aren’t growing. They’re neither declining nor growing. And uh both states are likely to be heavily impacted by what is happening in the war in Iran uh and the price of oil, uh, the uh the the price and the unavailability of uh helium and aluminum uh and uh fertilizer, urea. Uh it makes so crucial in making fertilizer. So, my own personal opinion is that we are most likely headed toward a recession later this year, and we’re seeing more and more of the name brand forecasters shifting their projections uh increasingly toward the likelihood of a recession.

MIKE BARNES 4:14

Brad Chastain, with your role at U.S. Money Reserve, educating so many people, what do you tell people who say, oh, what do I do? Recession’s coming, what do I do?

BRAD CHASTAIN 4:23

Uh same thing. Nothing changes in my mind, whether we think a recession’s coming or what’s not. We should always have an appropriate allocation uh that matches our goals and time horizon. Because there are, even if recessions aren’t expected, they still happen. There’s so many different events that can take place to catalysts and black swan event sort of situations that can then trigger recession, you always need to be prepared. So having the right allocation for your time horizon, a diversified portfolio, which we believe and have strongly made the case for, should include gold, is critical at all times.

MIKE BARNES 5:04

Brad used a good word there, prepare. Philip, I think a lot of people don’t prepare like they should. So you don’t want to wait until late to start figuring out to get your portfolio in order.

PHILIP N. DIEHL 5:14

Is that correct? Yeah, that’s absolutely correct. And one of the things that I believe that every investor needs to be looking at is the growing recommendation that people look at changing the base uh allocations among stocks, bonds, and alternative assets. And the favorite alternative asset is gold. And especially because of gold’s outstanding performance over the last two and a half years in particular. Uh, and we’re seeing more and more recommendations of allocations uh as high as 15, 20 percent, or even 25 percent uh to gold, and a reduction maybe of stocks, but certainly of bonds. And um and that’s being that’s being firmed up by both concern about uh recession and concern about uh rising inflation and rising interest rates. Uh I think that’s very sound advice. Um and I think it’s one of the reasons why we’re gonna see increasing demand for gold as people begin to make these uh allocations. People are considering gold today who never considered gold before because headline news, both mainstream and business news, uh is talking about it’s hard to avoid uh the what’s happening with gold prices over the last two years. And so um those allocation uh recommendations I think are beginning to get traction. And Brad is absolutely right. These uh the need to look at these allocations do not depend upon whether you’re expecting a uh a recession or not. But growing expectation and growing concerns, really fears about a recession, are something to bear in mind when you’re uh thinking about allocations to gold. Because gold prices right now are bargain. And I’ve said this before, uh you can’t reliably time any investment, and gold is like that, but we’re seeing gold at unusually low prices given the trend line we’ve seen over the last two and a half years, and the vast majority of uh financial advisors are expecting gold to continue that trend line in the near future and for an extended period into the long term.

MIKE BARNES 7:56

Brad, you do such a great job of explaining things to all of us. So explain this. Why does the financial system have so much trouble during a recession or something that’s close to a recession, but gold survives?

BRAD CHASTAIN 8:08

Yeah, the financial system and the real economy aren’t the same thing, but they’re so integrally linked. They they um they rely on one another. And as the economy slows down, goes into recession, you have a situation where, for one, banks aren’t as willing to lend and extend credit to businesses in a slowing economy. There’s less of a chance that they’re going to be repaid. It’s riskier. And at the same time, companies are less likely to try to borrow for expansion and to grow. And as we’ve talked about a lot, is the financial system, monetary system, relies on constant expansion, new credit being created in a debt-based monetary system. And so as that slows down, as the real economy slows down, it translates into the financial system that less credit is being created, but all the existing debt is still out there and has to be repaid with interest. And so then it becomes much more hard to much more difficult to service those debts and things. So there’s a lot of banking stress during that time. Um right now, banks are um more stressed than we’ve seen in a while. There’s been a lot of regulations that have taken places we’ve talked about previously, uh, that have shored up their balance sheets from on a paper perspective, but they’re still sitting on roughly $300 billion in unrealized losses right now, with interest rates having risen to uh such a degree. 2008, for example, they were on about 100 billion. So it’s about three times higher right now in unrealized losses in the banking system than they had in 2008. And when those bonds go down, that’s where we start seeing those bank failures, even. So uh Silicon Valley Bank and First Republic and Signature Bank last year, all of those similar scenarios where they had unrealized losses in bonds, some kind of triggering event where people end up going and starting taking money out, and then they can’t meet all of the depositor withdrawals, and um, and then it creates chaos. And a recession is one of those kind of triggering events that can exacerbate those sort of banking and financial issues.

PHILIP N. DIEHL 10:17

And Brad, one of the things that is different between today and and uh the days before the great financial crisis is that in response to these new regulations that were passed after the great financial crisis, that put new restrictions and requirements on banks, this shadow banking uh network has developed that is basically imperviable to regulatory uh inspection. There, because they are outside that regulatory regime that was created and imposed on the banks, we don’t know what their condition is like uh we do with the banks. And there’s growing concern, especially over the last couple months, about how some of these very big institutions are beginning to look like that they are under stress. In fact, they have a number of the biggest ones have put limitations on how much money or what percent of the investment that the their stakeholders can withdraw at any given time. And and uh I think that’s raised some alarm, so especially because some of the most reliable companies uh have been included. So, what can you what can you address about laying that on top of the stresses we’re seeing in the banking sector itself?

BRAD CHASTAIN 11:43

Yeah, absolutely. And and the word that Philip used, shadow banks, it sounds sort of black market or nefarious, but it’s really just a way of saying in the Federal Reserve and folks have really started using non-financial or non-banking financial institutions, right? Um it means they’re financial institutions, legitimate, they just are not traditional banks and don’t fall into the same regulatory requirements as banks. So insurance companies and and and pension funds and hedge funds and things like that have started, to Philip’s point, taking on what banks have done historically and haven’t been able to do as much of with the extra regulatory environment. So they’re kind of filling in a gap that was left due as a uh kind of an unintended consequence of all of the regulations. And yeah, it’s grown significantly. You hear a lot about private credit now. That’s a that’s a function of this, where companies are going outside of the traditional public bond markets or traditional bank lending uh to these funds to uh seek credit. Uh Blue Owl is a big one. I thought it was a tech firm when I first when it first popped into the news. I had I wasn’t familiar with Blue Owl prior to this, but they have a large private credit holdings and they’ve started restricting withdrawals from their um their uh investors, being able to not take their money out as those assets are much more illiquid. Uh, they can’t sell them at the proper price quickly enough to meet redemptions. But the it’s a bit more systemic because it’s become so big, and it’s outside of the existing banking sector, but the traditional banking sector also is a lender to these institutions, increasingly. So large banks increasingly have these riskier exposures that they’re not able to take on due to regulations just indirectly, lending to the lenders of those. So it stays off of their books and it doesn’t show up directly as a banking risk for the major banks, but they very much have the same exposure uh just indirectly. And so that’s the big systemic risk that to Philip’s point um really is not quantifiable and measurable right now.

MIKE BARNES 13:53

Well, Brad, it seems to all tie back to it seems to all tie back to a word you used earlier, chaos. And Philip, that’s why gold is a safe haven, correct?

PHILIP N. DIEHL 14:02

Yeah, that’s right. I mean, um, you know, as a former uh director of the United States meant inside the Treasury Department and uh former chief of staff at Treasury, I’ve watched the Federal Reserve and the and the Treasury Department come up with terms in the past that are, I often think are meant to paper over uh and put lipstick on what are uh actually more concerning types of financial innovations. And financial innovations are very typically one of the factors that leads to major stock market crashes. We’ve seen this over and over again. And these banking institutions, what these non-banking institutions that are now providing banking services, I mean, this is an oxymoron, that uh we that we uh it’s really a way of dressing up, I think, the flexibility that the banks used prior to the great financial crisis to uh uh to enrich themselves, to increase their profits, and to shift risk onto others, uh, including uh the holders of their assets. And these and because of the lack of transparency of what I still prefer to call shadow banks, because uh the shadow in shadow banks suggests that we really don’t see into them, or what we see into them is not really what’s there. Um and so I I think this is a cause of great concern uh for me, and the fact that so much of the stress that prior to the great financial crisis that was ignored was apparent, but what but people could see and regulators could see if they had wanted to in many cases. Uh in other cases they were blinded to it, but today we’re almost entirely blinded to it inside the shadow banking sector, and there’s a reason for that. The reason for that is because it’s all about increasing returns to management and uh stakeholders and shifting risks to others. And the others typically tend to be us.

MIKE BARNES 16:32

Well, it sounds like that financial storm could be headed this way, as you both say, and we need that golden, not a parachute, but a golden umbrella instead to weather the storm. Thank you so much, Brad Chastain and Philip Diehl, for joining us today. Thank you, Mike. Thanks, Mike. That is all the time we have for today’s episode. On behalf of all of us here in the U.S. Money Reserve Studios, I want to thank you so much for tuning in. If you have any questions or you want to learn more about today’s episode, you can call the number in our episode description and speak with one of the friendly account executives. They’re going to be more than happy to answer any questions you may have about precious metals and the strategic role they can play in achieving a secure and comfortable financial future. I’m Mike Barnes. We’ll see you next time on America’s Gold Authority Podcast.